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Updated Research Report on H&R Block

On April 2, 2014, we issued an updated research report on H&R Block Inc. (HRB). The tax preparer had earlier reported dismal fiscal third-quarter results, delivering negative surprises in the last three reported quarters of fiscal 2014, with an average miss of 301%.

H&R Block’s top line in the last reported quarter plunged 58% year over year and also missed the Zacks Consensus Estimate, largely due to revenues related to tax returns prepared but not yet filed. These will be recorded during the company's fiscal fourth quarter. Also, expenses incurred exceeded the amount of revenues generated, thereby inducing losses.

As most of the clients file their tax returns from January through April of each year, substantially all of H&R Block’s revenues from income tax return preparation and related services and products are received during this period. As a result, the tax preparer generally incurs loss in the first three fiscal quarters and delivers robust earnings in the fourth quarter of each fiscal. The Zacks Consensus Estimate for fiscal fourth quarter is thus pegged at $3.20, reflecting a year–over-year improvement of 25.9%.

Effective Jan 1, 2014, as per the Affordable Care Act (:ACA), all Americans should either have health insurance in 2014 or pay a penalty through their 2014 tax return. For those choosing to receive subsidized coverage, there will be a mandatory filing requirement in 2015 to report income earned during calendar year 2014. Therefore, from fiscal 2015, H&R Block’s expects to gain slightly from ACA.

Also, as part of the nationwide program for healthcare exchange enrolment, H&R Block partnered GoHealth Insurance whereby the company’s clients can purchase their healthcare insurance online or over the phone through licensed GoHealth agents. However, initiatives to run the pilot program in Arizona as a part of the healthcare exchange enrolment will be dilutive to earnings by approximately 3 to 4 cents per share in fiscal 2014. Nevertheless, H&R Block anticipates the transaction to be accretive in fiscal 2015 and beyond as ACA implementation gains momentum.

With respect to estimate revisions, this Zacks Rank #4 (Sell) tax preparer has witnessed downward movement in its estimate revisions. For fiscal 2014, the Zacks Consensus Estimate moved south by 2.4% to $1.63 per share. For fiscal 2015, the same moved down by 2.5% to $1.96 as most of the estimates moved down over the last 30 days.